Wednesday, February 29, 2012

Today is the end of February, and for songwriters participating in February Album Writing Month, the day when they are challenged to wrap up an album’s worth of songs written during the month. Much of this songwriting is happening out in public, with songs available for listening almost as soon as they have been written.

By the time the month is over, “FAWMers” will have written around 10,000 songs. In practical terms, that is about 15 times as many new songs as the casual music listener can listen to over the course of a year.

One lesson from this, a point mentioned many times before, is that if you merely want to listen to a wide variety of interesting recorded music, there is no need to ever pay for it. Music, of course, is part of a broader trend. It costs less than before to be an observer or spectator. It is not that interesting things are happening everywhere you turn, but with the Internet, when they do happen, they are not so hard to find.

Much of what goes on in the economy, notably including most advertising, is based on variations of the idea of collecting money at the door. As this becomes harder to do, adjustments will be needed almost everywhere.

Tuesday, February 28, 2012

Move Your Money and Bank Transfer Day weren’t the token protests they might have appeared at first. In all, 10 percent of U.S. bank customers changed banks in 2011 according to one survey. From everything I know about the history of banking, that has to be a record. And what makes it especially striking is that it came in a year when residential and job mobility were at historic lows. People often are forced to change banks when they move and change jobs, but that didn’t happen for many people last year. It shows that people consciously decided to change banks, then found the time to follow through.

Most people are extremely reluctant to change banks, so if 10 percent did so, it shows that more than a few banks are doing poorly indeed at meeting their ordinary customers’ expectations. Even more sobering from a banker’s point of view are the indications that this trend is far from over — that indeed, similar numbers of people are changing banks in 2012. Now that people have learned how to change banks, or have seen their friends do it, they are ready to do it again. This will put more pricing pressure on banks, and those that are not ready for it may find themselves slowly squeezed out of the consumer side of the banking world.

Monday, February 27, 2012

There has been talk this weekend of the United States selling some of its strategic oil reserves to ease oil and gasoline prices. It is a good thought, but this is not the right season for it. It is a move that would be better timed in June or July, when oil is seasonally at its highest prices. If the U.S. labor market continues to strengthen, as I believe it will, and if global political tensions remain unresolved, or hurricanes enter the Gulf of Mexico, U.S. gasoline prices will be near $5 per gallon this summer. At that point, a bit of price relief will make a real difference in the economy.

Friday, February 24, 2012

The European Central Bank is providing a new round of liquidity to banks in Europe as a consensus of economists now expect a recession there to last through this year. Banks are taking substantial losses this week on sovereign debt, especially from Greece.

HSBC is closing its bank in Japan, which it launched just four years ago. HSBC has been cutting back its operations in Pacific countries, with recent closings in Korea and Central America.

Bank of America says it can no longer sell mortgages to Fannie Mae. It says this will not affect its mortgage operations.

The OCC tonight closed Home Savings of America. The bank had $432 million in deposits. It had offices in Minnesota and California. The FDIC will send checks to depositors beginning Monday.

The failed bank had opened its California branches starting in 2007, two years after the problems in the real estate market there had become apparent.

In Georgia, state banking regulators closed Central Bank of Georgia, which had five offices in the west central part of the state and $267 million in deposits. Ameris Bank is taking over the deposits and purchasing the assets.

Thursday, February 23, 2012

The job market might finally be improving, but that doesn’t mean the road ahead will get any smoother for businesses that went into survival mode four years ago. A case in point: Procter & Gamble announced today it is cutting 5,700 jobs over the next 16 months. Its brands, such as Crest toothpaste and Tide laundry detergent, haven’t improved in recent years. Meanwhile, consumers have become more selective.

This is just one example of the dangers of playing it safe. Businesses like Procter & Gamble also have to adapt to rising energy costs, a changing distribution system, and as the economy improves, a tighter job market. It’s a situation that favors the more ambitious and adaptable businesses over the more established businesses that are just trying to survive.

Wednesday, February 22, 2012

If electric cars are going to catch on faster than anyone expected, it will be because of an increase in the price of gasoline and a decrease in the price of batteries. When you glance at world oil prices and U.S. gasoline prices over the last two months, the increase in gasoline prices is not hard to imagine. Battery prices too are making a move, owing not just to engineering advances but also economies of scale. The electric storage price point the auto industry is looking at is $200 per kilowatt-hour, and the question is no longer whether that is possible, but how soon.

Tuesday, February 21, 2012

“You got a new phone!” This commonly heard expression speaks volumes about the importance of mobile phones in modern life.

It is impressive, when you stop to think about it, that people so readily notice the 2-millimeter differences between one phone and the next. People tune in to this kind of fine detail only for things that seem especially important. By comparison, if a different everyday item, a hairbrush or a television, were replaced by a new one, five percent different, the change would not draw much attention.

This shows that people attach a high degree of importance to phones. People notice phones because important things happen where the phone is the focus of attention. Based on that, it seems unlikely that the fascination with phones as a way of staying connected could fade anytime soon.

Monday, February 20, 2012

At a Presidents’ Day sale I saw an office laser printer selling, quietly, for $50. It is the best indication yet that laser printers are beating out ink-jet printers for the casual user. Laser printers have always had a decisive advantage in ease of setup, cost per page, and printing speed. With lower initial purchase prices, customers can consider the purchase of a laser printer as a cost-cutting alternative to a replacement ink set.

The cost advantage of a laser printer is especially compelling for the home user who doesn’t have much to print. If you print an average of one page per day, you may find yourself throwing away a stale ink set while it is still half full. A toner cartridge, by contrast, can sit for years without any hint of decay, waiting for the day when you have something to print.

The disadvantage of a laser printer, at least at this point for the low-end user, is that it cannot print in color. Yet the documents that really need to be on paper don’t require color. They merely need to convey information accurately. The advance of laser printers and the gradual disappearance of ink-jet printers will bring about a tighter association between color and the electronic display. That is, if a document really needs to show color, we won’t expect to see it on paper.

Friday, February 17, 2012

Washington Mutual is set to exit bankruptcy as a mortgage reinsurance company. The former holding company of one of the largest bank failures ever finalized a deal with hedge funds yesterday that will allow it to retain millions of dollars in income tax credits it piled up during the final years of the bank’s operations.

Scientific studies of recent foreclosures are finding high rates of errors. The emerging consensus is that around 80 percent of U.S. foreclosures have substantial legal defects, such as forged signatures and documents, filings made by a bank that does not have legal standing for a loan, and the failure to file all required documents.

Capital One’s acquisition of ING Direct has been approved by regulators. With the acquisition, Capital One becomes the 5th largest bank according to deposits. The deal includes the U.S. operations of ING Direct only. To minimize brand confusion, the acquired bank will be renamed within one year. ING Direct is in good shape financially but had to be sold to raise money for its corporate parent, ING.

Citibank is paying $158 million to compensate the U.S. government for misleading mortgage documents its CitiMortgage unit filed over a six-year period in order to obtain insurance for risky mortgages. The bank had already changed it operating practices and accounting controls and set aside $125 million in connection with this case. The bank had an incentive program, discontinued last year, that paid bonuses to underwriting workers who found ways to circumvent accounting controls.

From everything I can see, U.S. real estate values have nearly finished their post-bubble decline and will stay near their current levels, on average, for about the next 9 years. Declining asset values are a problem for banks that rely on assets as collateral. The biggest declines in the last seven years have been seen in real estate and related securities. As real estate values level off, it will take some of the financial pressure off of banks.

The NCUA today placed A M Community Credit Union into conservatorship. The credit union has 16,000 members, primarily in Wisconsin.

Thursday, February 16, 2012

In-store pickup for online orders is a growing practice. Higher shipping costs are part of the reason.

The last time I bought a computer, I ordered it online and picked it up at a store. In my specific case, the advantages of this approach were compelling. I could get almost all the selection of the online store (not all items were available for in-store pickup, but nearly all). I got the merchandise faster than if I had had it shipped directly to me. I paid nothing for shipping.

As the price of shipping goes up, in-store pickup is a way to get around it. The integrated retailers are shipping new stock to every store almost every day anyway, so it doesn’t add much to their shipping costs to add in a few more items. Similarly, customers can usually combine the trip to the store with other errands, resulting in a minimal transportation cost on that end too.

For all the things Circuit City did badly in its time, in-store pickup was an area where it excelled. Now retailers from Walmart to Barnes & Noble have adopted a similar approach. I believe in-store pick-up has the potential to expand to ten times what it is now as shipping costs continue to rise.

Wednesday, February 15, 2012

Gasoline prices have been inching up since Christmas, and this is not just the usual January–June increase in petroleum prices. That seasonal increase shouldn’t be hitting yet because of the mild winter weather in the northern cities, leading to an unusually low demand for oil for heat. And, the increase from the December low to now is almost large enough to cover the normal seasonal fluctuations in prices, and it is only February.

It is mainly supply concerns pushing oil prices higher. With Iran threatening to close the Persian Gulf to shipping, its ally Syria on the verge of governmental collapse, and political turmoil in nearby countries of the Arabian Peninsula and Africa, it is easy to imagine events that could disrupt the flow of oil.

Hints of an improvement in the U.S. labor market may also be helping to increase prices . If the number of people driving to work is increasing, the need for motor fuel is also increasing.

Tuesday, February 14, 2012

Brendan Barrett of United Nations University writes about plans to make Japanese towns more self-sufficient when they are eventually rebuilt after the damage from last year’s tsunami is cleaned up. The biggest challenge, not surprisingly, is energy.

For a community to be more self-sufficient and disaster-resistant, much of the energy production will have to be decentralized. That is a prospect that sparks political resistance from commercial interests connected to industrial-scale electric production and distribution.

Monday, February 13, 2012

In American culture we are taught to attack our work. The theory is that we’ll get the most done if we give work our full energy and attention. Often enough, that is basically correct. But that does not mean that is the right approach to take with all the work we do all day long.

You don’t have to look very far to see the limitations of the American take-no-prisoners approach to work. Consider two other characteristics of American life: we spend nearly as much time recovering from work as we do working, and when the recovery does not come fast enough, we suffer from ailments such as sleep loss and indigestion far more than people in most of the world.

This makes sense if you consider that whenever you are attacking your work, your work is also attacking you. If work is a battle, then when you work, you are in a battle. It is no wonder if it takes hours to wind down after the battles that most of us put ourselves through in our daily work.

Yet much of this battling is unnecessary. Most of the work we do is the same work we have done before. For this routine work, instead of pushing against it, it is better to seek the natural rhythm of the work. You will find yourself going slower this way, yet by working with more clarity and making fewer mistakes, you are likely to find that you have accomplished more by the end of the day. Better yet, you won’t spend the evening and most of the night recovering from the stress of the day’s work.

Obviously, this isn’t the right way to approach all work. In those moments when you have to be on, when you have to perform because time is limited and the world is watching, you want to give your work everything you’ve got. But all professional performers know you can’t perform all day long. The more intensity you give your work, the sooner you will have to stop. A stand-up comedian can go for an hour at most; a musician plays for two hours; a football game is over in three hours; a radio personality is on for four hours at a time; the stock exchange closes after six and a half hours. Anyone who tries to be “on,” in the sense of performing, for eight hours in an office or factory is making a mistake. Every form of work has a flow, or a rhythm of action that makes it more efficient. Find that flow, and you’ll get more done. This is especially important toward the end of the day, or if you are working in the evening. This is when it is especially good to be working in a way that won’t build up stress. You can start to wind down while you are still working. If you get good at this, and your work is pleasant enough to allow it, you can work right up to the minute you are ready to go to sleep. That’s something you simply can’t do if you think of work as something you have to attack.

Friday, February 10, 2012

The long-awaited mortgage settlement arrived with a whimper on Thursday, with 49 states and 5 banks on board, but covering only perhaps 5 percent of the banks’ potential mortgage-related legal liabilities. Far from the blanket immunity that banks were seeking, the terms of the settlement resolve only a subset of regulatory and government enforcement actions. Notably, banks still face a wave of legal actions from mortgage customers and purchasers of securities based on mortgages. In addition, bank employees may still face criminal charges and removal orders from regulators for any individual misconduct. The settlement is still a good deal for the banks, as it removes the threat of potentially severe sanctions by banking regulators.

Participating banks were Bank of America, Ally Financial, Citigroup, JPMorgan Chase, and Wells Fargo. Nearly half of the cost of the settlement will be paid by Bank of America, and nearly half of the payout will go to recipients in California.

Even the scaled-back mortgage settlement could face legal challenges, with some observers saying it still appears to exceed the statutory authority of the participating states.

For now, the announcement of the settlement could unleash a new flood of regulatory inquiries and subpoenas covering the many areas that turned out to be excluded from the settlement. The first of these was unsealed today in Massachusetts, where securities regulators are seeking documents from Bank of America about specific mortgage-backed securities it sold in 2007.

All eyes are on Greece again, as the country missed a deadline for qualifying for international relief. Greece will continue efforts to agree on a budget over the weekend.

With Greece in political turmoil over its finances, there are rumblings in Portugal about tightening its budget still more, in the hope of avoiding a similar fate. It is Italy that is worrying loudest about the latest developments in Greece, though, and that country’s banks were the focus of S&P downgrades today.

The OCC closed two small banks tonight, with combined deposits of $261 million.

SCB Bank, Shelbyville, Indiana, 4 locations. Real estate, development and construction loans, non-performing loans, and foreclosures were excluded from First Merchants Bank’s acquisition of the assets.

Charter National Bank and Trust, Hoffman Estates, Illinois, 2 locations. It was another in an ongoing series of Chicago-area bank failures.

In both cases, the deposits and assets of the failed bank were acquired by an in-state bank.

Thursday, February 9, 2012

I wrote yesterday of the importance of protecting public goods from the high costs of privatization and commercialization. Some things are simply so much less expensive to give away than to sell that selling doesn’t make sense as a financing mechanism, and these are the public goods I am looking at. As one business executive famously put it, “It’s hard to compete with free.” Or, as another said, “It’s not fair to have to compete with people who aren’t even trying to make money.” In general, when a valuable product can be produced by volunteers, the competing commercial products will tend to fall by the wayside.

While there may be a political push this year to turn public goods into private profit opportunities, that is just a brief moment of resistance in a long-term trend toward a greater number of public goods. This is a trend that will not stop with the web browser and the encyclopedia. Last year, we saw the emergence of stock photography as a public good. The English dictionary or the global street atlas could be next. While two major attempts in a row to produce an open-source database have fallen into commercial hands, it could be that the next such effort will succeed in establishing the database of record.

And these are just a few examples. The success of each new public good will inevitably require competing commercial efforts to adapt. It is a story we can expect to see repeated with regularity over the coming years.

Wednesday, February 8, 2012

Some things are naturally public goods, meant to be given away to all takers. For a public good, the cost of producing it once, for a single customer, is not much less than the cost of providing it to the world at large. Two of the best examples of public goods are weather forecasts and epidemiological data. This information costs tens of millions of dollars to put together, but the cost of distributing the results is much smaller, in the tens of thousands.

Public goods are typically produced by governments, volunteers, and charities. Some are incidental parts of business operations. Attempts to turn public goods into commercial products lead to enormous inefficiencies and business failures. That’s because the cost of packaging a commercial product may be much higher than that of giving the same product away without the commercial packaging. Imagining, for example, paying for weather forecasts the way you pay for telephone service. It could cost that much to create a billing, security, and legal apparatus around the weather, to collect money from paying customers while preventing the information from leaking out to everyone else.

The reason this is important right now is that there is a political movement this year to privatize virtually all of the functions of government. In a few cases, the need for privatization is obvious. The government ideally should not be operating a mortgage company or a credit card lender, a golf resort or a shopping mall. But in other cases, the results of privatization could be unpleasant. That is especially the case when ideologues attempt to privatize public goods, such as the weather.

Tuesday, February 7, 2012

In the discussion surrounding the release of auto sales reports last week, I saw a surprising degree of denial about the changing role of cars and trucks.

The United States’ average vehicle age set another new record high. Soon, the conventional thinking goes, the age of vehicles will force owners to buy replacements, and then, new auto sales will return to familiar levels.

But that doesn’t have to happen. First, the long-term trend toward longer vehicle life isn’t about to make a U-turn. Vehicles will continue to last longer. Second, it is only the owners of vehicles at the end of their useful service lives that face any pressure to replace. That isn’t nearly enough vehicles to lead to a detectable surge in sales. Third, the replacement vehicles don’t have to be new vehicles. If someone is ready to scrap a 1986 pickup truck, a replacement from the 1998 model year might seem new by comparison, but it doesn’t actually count as a new vehicle sold. And finally, it is only when business is booming that the hassles of maintaining old equipment get on managers’ nerves. When business is slow, there is more than enough time to get the latest repairs and maintenance scheduled. The worry is not about how much time it will take, but about how much it may cost — a focus that rarely favors scrapping a vehicle. The number of places where business is booming is, again, not enough to create a boom in sales of equipment in general, or automobiles in particular.

Automobiles’ replacement cycles may be changing faster right now because of financial stress, but that doesn’t mean the economy will improve and those changes will reverse. When people learn a new, more efficient way of doing something, they often stick to it even after circumstances offer them more choices.

Monday, February 6, 2012

Polypropylene is becoming more popular as a basic material for manufactured products such as bottles where fuel costs are an important part of the total cost. A juice bottle made with polypropylene might cost more than one made with polyethylene, but it weighs less, and for a product like orange juice that might cross half a continent to get from the factory to the end user, the fuel savings are enough for a product designer or an accountant to care about.

Cars also travel long distances, and Ford is using polypropylene, blended with the plant fiber kenaf, to make the new Escape lighter. The interior part of the door is 25 percent lighter with the new design, improving the fuel economy ever so slightly. With transportation costs rising, we are likely to be seeing more polypropylene in our daily lives.

Friday, February 3, 2012

With so much speculation surrounding Greece, it may actually be Iran that is on the verge of not being able to pay its foreign debts. That is a worry, at least, of two nearby countries, which yesterday placed new restrictions on trade loans to Iran. Bank regulators in United Arab Emirates in Qatar have been keeping a close watch on Iran’s financial condition and now have ordered their banks not to issue letters of credit for trade with Iran. This is a substantial blow to the mercantile sectors of these countries, so regulators wouldn’t take this step unless there was real worry about Iran paying its bills. Iran’s economy has been in perilous shape for five years, hobbled by government corruption and the declining influence of oil.

New York State today sued three banks, claiming that the back-room system used by many banks for mortgage transfers is operating outside the law. The state is seeking $5,000 in damages for each erroneous court filing, forfeiture of profits, and other penalties.

Bowing to public pressure, Sallie Mae says it will stop charging the $50 fee it currently assesses its student loan customers for every quarter in which they are unemployed. The public interest campaign against Sallie Mae’s unemployment fee was modeled after the campaign against Bank of America’s announced debit card activity fee, which that bank called off three months ago after a flood of customer complaints.

Freddie Mac’s trading department holds derivatives based on mortgage interest. Freddie Mac is said to hold $3 billion of these securities, which could become worthless if homeowners are able to refinance. It represents a striking conflict of interest for Freddie Mac, which stands to lose a fortune in its derivatives trading if it approves large numbers of replacement mortgage loans. The disclosure of this practice, which has been going on for years, has prompted new calls to have the unprofitable government-owned mortgage securities firm shut down.

Thursday, February 2, 2012

As the price of beef creeps up, it is seen less as an everyday food and more as a luxury or specialty food. I saw another sign of this in a restaurant buffet today. Compared to two years ago, the restaurant has reduced its use of beef by half. It is in fewer recipes and is sliced thinner when it is used. At this restaurant, the same thing is happening, though to a lesser extent, with fish.

The transition is easiest to see by comparing these food ingredients to shrimp. The role of shrimp in the buffet has not changed, but now, beef is used at least as sparingly as shrimp. Fish, which used to be as common as shrimp, is now only a single item on the buffet.

Wednesday, February 1, 2012

The 21st century will not be remembered for bigger and better internal combustion engines, nuclear power plants, or universities, not any more than the 20th century is noted for its advances in coal-burning trains, plantations, and razor blades. Those are things that seemed especially important at the beginning of the century but were not so impressive a few decades later. The defining qualities of this century are slow to take shape and perhaps not so easy to recognize at this point. Perhaps, for example, the Internet and electrical storage are two of them, but the technology changes so unpredictably it seems too early to say. The reason to try to get an early fix on which innovations matter and which ones don’t is so we can stop investing in things that won’t matter or aren’t what they seem to be. But the last eleven years have already given us reason enough to doubt our ability to predict.